Since the UAE Funds Law came into force on 26 August 2012, ESCA have received many questions on how it will implement and interpret the new requirements.
ESCA held a public meeting on 20 November 2012 where they shared their interpretation of some of the key provisions of the UAE Funds Law. This higher level of transparency from ESCA is welcome and signals that they are keen to do what it takes to appropriately regulate the funds industry in the UAE.
Key issues covered in the meeting included:
- whether 'existing clients' and 'reverse enquiries' are caught;
- the scope of promotions conducted outside the UAE;
- applicability of the transitional period;
- application of the definition of 'Mutual Funds'; and
- some related regulations to be issued in the near future.
As you may be aware, on 26 August 2012 the Emirates Securities & Commodities Authority ("ESCA") officially put into force their Board Decision No. (37) of 2012 (the "UAE Funds Law"). For our international clients, the key change introduced was that all funds marketed in the UAE would need to be: (i) pre-approved by ESCA; and (ii) distributed through a locally licensed placement agent. More significantly for firms based in the Dubai International Financial Centre (the "DIFC") there were no options allowing them to service UAE investors without having to first obtain a new license and then comply with the additional requirements of the UAE Funds Law. Since the international funds industry largely historically relied upon a set of tolerated practices whereby discrete marketing of funds could be made to a limited group of sophisticated investors (the "Tolerated Practices"), there has been much debate on the implementation of the UAE Funds Law.
On 20 November 2012, ESCA held an information session where senior members of ESCA set out their interpretation of key provisions of the UAE Funds Law and gave some insights on how they intended to implement it. In summary, the key developments are:
- 'Existing Clients' and 'Reverse Enquiries'
ESCA clarified that in certain circumstances it does not consider the UAE Funds Law to apply to:
- marketing new products to 'existing clients'; and
- selling products to new clients who make 'reverse enquiries'.
This is in line with other international jurisdictions, which typically focus upon regulating active marketing to unsolicited clients. Although ESCA did not provide details on what it considers to be the limits of a 'reverse enquiry' or an 'existing client', we consider it would be wise to implement the usual international best practice measures for dealing with these forms of distribution (e.g. documenting reverse enquiries, training sales staff, using scripts for telephone inquiries and implementing policies on third party referrals). It must be stressed that ESCA's position on 'existing clients' or 'reverse enquiries' is not set out in the UAE Funds Law and therefore is founded on its own interpretation of the law and its regulatory priorities.
- Promotions conducted outside the UAE
ESCA has made it clear that marketing activities taking place in the UAE will be covered by the UAE Funds Law and that marketing activities taking place outside the UAE will not be covered (irrespective of whether the target is a UAE national or resident). It was not elaborated upon whether the DIFC is considered to be outside the DIFC (although there is an argument that it is a separate jurisdiction), but this clarification is nonetheless welcome, as otherwise it is very difficult to implement a 'reverse enquiry' model of distribution that is not unduly restrictive (e.g. a 'hard' offshore marketing model).
- Transitional Period
Besides applying to currently licensed entities, ESCA has confirmed that the transitional provisions of the New Funds Law will also apply to promoters who have previously marketed funds in the UAE before 26 August 2012 (whether or not they did so on a regulated basis). Technically, this should mean that such promoters could rely upon the Tolerated Practices until 26 August 2013 (the "Transitional Period"). Thereafter, such promoters will either need to either make arrangements to comply with the UAE Funds Law or structure their affairs differently. In any event, ESCA made it clear that new promoters who did not previously market funds in the UAE will not have the benefit of the Transitional Period.
- Definition of "Mutual Funds"
Given the very broad definition of a 'Mutual Fund' in the UAE Funds Law and ESCA's stated intention to interpret it as broadly as possible, there has been some confusion as to whether various financial products would be regulated by the UAE Funds Law.
ESCA confirmed that short term money market funds would not be regulated by the UAE Funds Law, while longer term debt funds would be regulated. This position suggests that ESCA does make meaningful distinctions on what types of financial products are to be regulated by the UAE Funds Law and therefore a careful analysis of a financial product is warranted before making any decisions about distribution in the UAE.
Interestingly, ESCA also considers that a fund platform (whereby investors choose fund products) is a form of reverse solicitation. The fact that ESCA did not specify that the fund platform itself was regulated by the UAE Funds Law suggests that ESCA do not consider that a fund platform fulfils their definition of being an mutual fund.
- Future regulations
In the near future, ESCA will be publishing regulations that specify:
- licensing requirements for a firm to become a placement agent (which will allow an international firm to independently market their funds without having to use a locally licensed competitor);
- which jurisdictions it considers to be 'foreign free zones' (this will determine whether a fund offering requires a minimum subscription of AED 1 million);
- which regulators it considers to be of a similar quality to ESCA (this will determine if a fund can be offered to retail clients);
- regulations for fund service providers (e.g. fund managers and administrators); and
- further regulations for specialist funds (e.g. REITs and ETFs).
We understand that the above developments will not be widely published or otherwise officially stated (e.g. by way of a written ESCA circular or a statement on their website). However, given that the above information was communicated at a public meeting, we consider that it is a reliable basis to make future plans and that ESCA would give sufficient forewarning if it changes its interpretation (although we caution that ESCA is free to change their interpretation at any time).
Given the general regional trends in respect of the distribution of foreign financial products, it is advisable for international businesses to carefully consider their strategy for reaching the Middle Eastern investor base. For example:
- new entrants should assess the optimal way to structure their distribution of funds into the UAE (e.g. through 'reverse solicitations' or engaging a local placement agent); and
- more established businesses should assess the most effective way of conducting their existing UAE business (e.g. becoming a licensed placement agent or relying on 'existing clients' and 'reverse enquiries').